Not a Big Enough Ticket To Support Your Sales Cost or Commission Structure

Many products cannot be sold effectively or efficiently because the cost of sales is simply too high. I remember seeing this problem all too well early in my consulting career when I was consulting with a pharmaceutical start-up. They were just getting their flagship first product through FDA approval, had worked out the manufacturing processes, and obtained all the necessary certifications for their production facility. It was only then that we all realized there was a problem with the simple economics of being able to afford to hire, train, pay and manage sales reps to call on all the doctors that could potentially use their product. The sales reps weren't able to write a large enough sales ticket to cover their commission. This is called the "Size of the Sales Ticket" problem.

The analysis of the costs was pretty straightforward, but the essence of the problem was that each individual sales person could not individually generate enough sales to make each sales call financially worthwhile. While their niche product had very good margins, it was unlikely that the doctors, called on by the salespeople, would prescribe enough of it to cover the total cost of the sales team and its management while achieving target profits. The cost of maintaining a sales force that could only call on a set number of doctors per week was just too great for that expected amount of sales per doctor or the amount of sales per salesperson. The cost of sales per unit was too high. The cost of sales was going to be too high because there was a limit to the amount of sales productivity--the number of doctors called on per day or week due to the necessary time of each sales call involved.

I see this type of problem in a lot of the small and mid-sized businesses I work with, particularly for those companies that rely on face-to-face salespeople making sales calls. There are a number of reasons why this problem has become more and more common as time goes on. Primary among them is the indisputable trend toward margin compression in nearly every industry today. Margins are simply getting smaller as competition is increasing and as companies become more creative in reducing costs and finding alternative channels of distribution that are more cost efficient. There is less and less room on the income statement for costly sales models.

The pharmaceutical company found a solution to its cost of sales problem. Their solution was to partner with another pharmaceutical company whose sales reps were already making calls on the doctors that were also the target market for my client. This way, the partner company's salespeople could "write a sales ticket" for my client's products as well as the products of their company which spread the cost of the sales call among a greater number of products sold. There was also enough incremental margin in my client's product with little incremental selling cost that the partner company would benefit from carrying my client's product.

The pharmaceutical company found a workable solution through partnering which was a way for them to outsource their cost of sales to a more efficient channel. To address this issue we have a choice of two basic strategies:

1. Changing the time horizon in your thinking about profit and cost of sales.
2. Change the sales model.

Changing our time horizon means that sometimes we need to factor the lifetime profitability of a new customer in considering whether the cost of sales is, in fact, too high. For example, if we know that on average, a customer stays with us for 5 years and has considerable profitability in the second through fifth years it might be an acceptable business decision to make the sales cost investment in new customer acquisition. That investment may cause you to lose money on the initial sale but is worthwhile because you know you will make up for it down the road with the customer. The first sale is a loss leader for the customer's total profitability. Embracing this strategy also has the advantage of putting the spotlight on customer retention which is a key for any company's long term profitability.

There are a number of ways to look at re-engineering the sales model from the traditional salesperson's face-to-face selling, including:

• Sell online - Selling online can be one of the lowest cost of sales methods of distributing a product or service and is even becoming prevalent in b2b as well as b2c industries. This trend will only continue.
• Telesales - Using an outbound telesales team or service to provide a lower cost sales model. There are a lot of inefficiencies inherent with face-to-face selling that could be avoided with telesales.
• Outsource Sales Functions - Outsource all or part of the sales functions to make your salespeople more efficient.
• Pull (Advertise to "call now") - Use advertising differently to get customers to call in as pre-qualified rather than require your sales reps to reach out to both the qualified and unqualified prospects. With your team focused on qualified prospects, their productivity as measured by their close rate will be much higher.
• Independent Distributors - Use independent third parties to sell your products which can be more efficient than you or can bundle your product in with other products or services in a broader sale (thus increasing the sales ticket to a profitable level).
• Partnerships - Create a partnership with another company (or companies) so that they can sell your products. It might also make sense to have a two way partnership where they are selling your products to some markets while you can have your salespeople also sell their products. This solves the problem for both of you.
• Hybrid - Keep your sales reps focused on big opportunities and use another channel for smaller opportunities or any combination of methods.
• Take on Other Products - Either develop or distribute other products so that your sales reps can increase their sales ticket size and cover their commission and cost.
• Re-engineer Your Products - It can be possible to re-engineer your company's products to make them more efficient to sell. This could mean making them more standardized so that customers can buy them from a web site, a product brochure or in greater quantity.
• Improve Sales Tools - Salespeople with better tools, including better management, can have greater efficiency to increase their close rate or increase the number of prospects they see in a day. This is an increase in productivity.

Solving the "Size of the Sales Ticket" problem is about re-engineering the sales process for more efficiency or re-engineering your business model itself to change the way you do business or think about business. The only thing we can be sure about is change in our business environment and in this age of globalization we can be sure that competition can only increase. For budding entrepreneurs, the "Size of the Sales Ticket" issue is an important consideration in determining whether a business idea/business plan is executable. If a product or service in a business plan cannot be sold efficiently, by covering its sales and delivery costs, then the business plan is not viable.